According to a new report, for the New York State Common Retirement Fund, the third largest pension fund in the country, a move away from fossil fuels would have made each of the fund’s 1.1 million members more than $4,500 richer.
Photograph: Paul Weiskel/Demotix/Corbis

New York State’s pension fund would have an additional $5.3bn to give to its retired employees if it had divested from fossil fuel companies and put that money into clean energy, according to a new report.

The analysis, compiled by research firm Corporate Knights, assessed the fund’s top 100 domestic and international equity holdings, and calculated how much it would have earned over the past three years if it had got rid of its investments in coal, oil and gas companies.

The New York State Common Retirement Fund is the third largest pension fund in the country, behind California’s CalPERS and CalSTRS, with $184.5bn held in trust for retirement benefits. According to the report, released this week, a move away from fossil fuels would have made each of the fund’s 1.1 million members more than $4,500 richer, and helped the state cover nearly 12% of the costs following Hurricane Sandy in 2012.

Toby Heaps, CEO and co-founder of Corporate Knights, said the numbers show that divestment makes prudent financial sense.

“Divestment is good for reducing portfolio risk,” he said. “It’s also a powerful way of sending a message about the expectations investors have of companies and governments to be rational about accelerating the energy transition in a timely manner so that we avoid scenarios of climate chaos, which would make it difficult for anybody to earn returns.”

“Government policy, which we think will only strengthen, is beginning to capture the societal costs of burning fossil fuels, enhancing the competitive position of investments in energy efficiency and renewables,” said Stu Dalheim, vice president of shareholder advocacy for Calvert Investments, which invests in socially and environmentally responsible businesses. “The Paris Agreement sent a clear and important signal to the market that we are moving toward a low carbon energy system.”

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The report comes as New York State Senator Liz Krueger is pushing to pass a bill that would require the state’s pension fund to divest from fossil fuels. The Fossil Fuel Divestment Act would require the fund to sell off its stocks in the top 200 largest fossil fuel companies by 2020.

“By divesting from fossil fuels, the [Common Retirement Fund] will send a message that it is unacceptable for any institution to profit from activities that threaten the future of society, and will begin the process of delegitimizing a business model that, while financially profitable in the short run, is socially and morally bankrupt,” wrote Krueger in her announcement of the bill.

The pension fund administrator, the state comptroller Thomas DiNapoli, declined to comment on the report. But he referred to a letter he sent to Krueger last December that outlined long term plans to put several billion dollars into industries with lower carbon footprint. He said a review of the pension fund’s investments since 2010 showed that it had gained $1.8bn in oil and gas stocks and lost $261.6m in coal.

“I have taken a comprehensive, reasoned, prudent and scalable approach to addressing the risks of climate change with new investment and engagement strategies,” DiNapoli wrote.

The Corporate Knights report looked at how the fund would have performed if it had divested from fossil fuel companies starting in October 2012. Researchers removed the most carbon-heavy coal and fuel companies, ranked by Fossil Free Indexes, which lists the top 100 coal companies and the top 100 oil and gas companies by the potential greenhouse gas emissions emitted from their reserves. The analysis also excluded utilities that generate more than 30% of their electricity from coal, provided by South Pole Group.

The report then replaced these investments with money in climate-friendly companies that earn more than 20% of their revenue from environmental markets and technologies. Verified by FTSE Environmental Markets Index or Bloomberg New Energy Finance, these companies include Dover, an industrial equipment maker, and Whole Foods Market.

“Clean energy indices have out-performed the market over the last year, three years, and five years,” said Brett Fleishman, senior analyst at 350.org, a climate policy advocacy group. “And clean energy indices have way out performed oil and gas indices over the last 12 months.”

“The simple fact is that the world price of crude oil has crashed, natural gas prices are very low and coal prices have fallen,” said Severin Borenstein, economics professor at UC Berkeley’s Haas School of Business. “Any investments in fossil fuels when that happens are going to lose money.”

Borenstein said it’s difficult to predict whether fossil fuels will be a better or worse investment than alternative energy into the future. “In order to outperform the market with your investment picks, you have to know something the market doesn’t,” he said. “If everyone knew that fossil fuel companies were overvalued, the stock would have already dropped to reflect that.”

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If fossil fuel prices rebound, then the value of oil and gas will go up, at least in the short term, Fleishman said. But this doesn’t necessarily make fossil fuels a good long term investment. “Large pension systems and endowments are lumbering giants, who should not pretend they can swiftly out maneuver the market, meaning riding oil prices back to some ephemeral peak and selling their stocks before everyone else,” he said.

But some experts say the demand for fossil fuels is likely to remain high, making them a sound financial bet.

“The long term prospects for fossil fuels are extremely bright, simply because demand continues unabated,” said Frank Wolak, a professor of economics at Stanford University. “Unless you can reduce the demand for fossil fuels, it’s highly unlikely to be a poor investment into the future.”

But demand could drop as countries work to achieve the ambitious emissions targets agreed on in Paris. Divestment campaigners say that it’s safer to invest capital in an industry that isn’t facing possible limits to its production.

“While fossil fuel stocks may represent opportunities for in-and-out investors who believe they can make money by timing the market, for long-term strategies it is irrational to risk being stuck with a bag of stranded assets,” said Heaps.

For investors looking to put their money in green industries, solar energy might not necessarily be the best option. Some solar company stocks, like SunEdison and SolarCity, haven’t performed well over the past 12 months. Heaps said investors need to broaden their view and look beyond solar power to the clean energy industry as a whole.

“There is a misconception that climate friendly investing starts and stops with pure play solar and windmill stocks,” he said. “There are hundreds of blue chip companies which earn more than 20% of their revenue by providing environmental or climate solutions.”